Download - COMMON RESOLUTION OPTIONS AND RECENT NIGERIA BANK RESOLUTION EXPERIENCE Adeleke A. A. Director
COMMON RESOLUTION OPTIONS AND RECENT NIGERIA BANK RESOLUTION
EXPERIENCE
Adeleke A. A.DirectorAsset Management Department, NDIC.
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OUTLINE
Introduction Applicable Failure Resolution Options:
Rehabilitation; Deposits Pay-out; Insured Deposits Transfer; Purchase and Assumption (P&A); and Bridge Bank
Experience So Far Challenges
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BANK A N’ Million
% To TotalAssets
BANK A N’ Million
% To TotalAssets
BANK A N’ Million
% To TotalAssets
TOTAL ASSETS 1,957,258 504,163 372,612
DEPOSIT LIABLITIES
1,385,936 71 356,137 71 243,747 65
PAID UP CAPITAL 16,316 <1 14,481 <3 9,375 <3
SHAREHOLDERS’ FUNDS
340,735 <2 129,373 25 77,559 <21
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INTRODUCTION
Effective resolution is a series of systematic action designed to end a bank’s distressed condition.Focus of a good resolution option: Maintains public confidence and stability in the
banking system. Ensures fairness, equity, transparency and
accountability. Instills market discipline while discouraging moral
hazards. Achieves minimum disruption to payment
system.
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INTRODUCTION
Speedy payment to insured depositors and quick realization of assets for the benefits of uninsured depositors and creditors.
Minimize the likelihood of having to bail-out uninsured depositors and creditors.
A typology of problem banks Illiquid but solvent Insolvent but liquid Illiquid and insolvent.
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RESOLUTION OPTIONS
Rehabilitation Financial Assistance (Accommodation Facility). Imposition of Holding Actions. Change in Management. Take-Over of Control & Management. Acquisition & Sale of Banks.
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RESOLUTION OPTIONS
Deposits Pay-Out Bank is closed and put in liquidation. Insured depositors paid up to the insured limit. As assets are realized, uninsured depositors are
paid on pro-rata basis.(i) Merits
Increase market discipline since depositors could also suffer losses. (small depositors protected, rest sustain losses unless there are proceeds of assets to share)
Shareholders lose all their investment unless there is still fund after other creditors have been fully paid from the realized assets.
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RESOLUTION OPTIONS
(ii) Demerits Delay in paying depositors undermines public
confidence. Liquidation of assets could extend to many
years, often more than 10 years. Uninsured depositors, other creditors and shareholders could therefore wait for many years before being paid, if they will ever be paid.
Borrowers lose access to loans with potential macroeconomic consequences.
Pay-out might maximize fiscal outlay at the time of closing.
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RESOLUTION OPTIONS
Insured Deposits Transfer Insured deposits of a failed bank transferred to
another bank(s). Acquiring bank(s) given enough cash and/or
risk-less assets to cover insured deposits transferred.
A variant of pay-out option as only insured deposits would be fully covered.
Deposit insurance agency would take over assets for realization.
Acquiring bank(s) might also purchase some or all the assets of the failed bank.
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RESOLUTION OPTIONS
(i) Merits Least cost option as premium was received to
pay insured depositors. All merits of Pay-Out also applies. Insured depositors could continue to enjoy
banking services without any disruption from the acquiring bank(s).
(ii) Demerits Loss to uninsured depositors and delay in
paying them from realised assets, if any, could undermine public confidence.
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Liquidation of assets could be protracted and extend to many years.
Borrowers could lose access to loans with the negative impact on macroeconomic situation.
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RESOLUTION OPTIONS
RESOLUTION OPTIONS
Purchase and Assumption (P&A) Healthy bank purchase assets and assume
deposit liabilities of the failed bank, similar to M&A.
A failed bank could be split to make it attractive to banks that wish to enhance market penetration or establish new branches where the failed bank had branches.
Acquirer(s) chosen on the basis of highest premium offered during bidding.
Deposit insurer or government would put cash/securities for the difference. Such could be recovered from bad assets of the failed bank.
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RESOLUTION OPTIONS
(i) Merits Depositors are protected. Continuity in rendering services thereby
sustaining public confidence in the banking system.
Other creditors might not be paid thus providing some form of market discipline.
Avoids disruption to depositors, borrowers and payment system.
Shareholders wiped out and inefficient bank closed.
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RESOLUTION OPTIONS
(ii) Demerits Large and uninsured depositors protected, thus
eroding market discipline. It could be costly especially if fund from Central
Bank/government/deposit insurer to fill gap between total deposits and assets purchased is significant.
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RESOLUTION OPTIONS
Bridge Bank A new bank created to acquire assets and
assume liabilities of the failed bank. It is a variation of P&A.
New bank could be privately owned or the government could create it for the purpose.
If government owned, it could be operated for about 2 years after which it would be sold to fresh investors.
(i) Merits Avoid losing the failed bank thus protecting jobs
and continuing banking services to the community.
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RESOLUTION OPTIONS
All shareholders would lose their investments. All depositors and creditors would be covered
and that would engender public confidence in the banking system.
(ii) Demerits Undermines market discipline as it encourages
moral hazard. It could be costly. The bridge bank could fail thus postponing the
“evil day” and aggravating the cost of resolution.
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EXPERIENCE SO FAR
REHABILITATION Take-Over Of Control
1 Bank in 1992 5 Banks in 1993 16 Banks in 1995 1 Bank in 1996 1 Bank in 1999
Sale of Banks 7 banks sold to new investors.
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EXPERIENCE SO FAR - BANK FAILURE AND EXTENT OF FAILURE IN NIGERIA BETWEEN 1994 AND 2006
Year of Closure
No of Banks Total Assets(N’B)
Total Deposits(N’B)
Ratio of Assets of Close Banks to Total Assets of Banks Ind(%)
Ratio of Assets of Close Banks to Total Deposits of Banks Ind(%)
Ratio of Assets of Close Banks to GDP(%)
Number of Depositors
1994 4 6.10 2.00 1.94 1.12 0.66 6,411
1995 1 0.40 0.80 0.09 0.38 0.02 7,416
1998 26 34.60 16.30 4.50 4.34 1.11 1,709343
2000 3 2.70 3.80 0.14 0.45 0.06 31,969
2002 1 20.20 11.60 0.68 0.95 0.35 228,585
2003 1 2.10 3.41 0.06 0.24 0.03 1,044
2006 13 160.10 177.28 1.23 4.69 0.55 961,211
TOTAL 49 165.9 215.19 0.93 2.59 0.44 3,165,979
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EXPERIENCE SO FAR
Liquidation Activities Claim settlement
N3.3 billion paid out of N5.2 billion Insured Deposits
N6.14 billion paid out of N10.9 billion declared liquidation dividend to uninsured depositors
Depositors of 11 out of 34 banks have been paid in full
Creditors of 7 banks have received liquidation dividend
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EXPERIENCE SO FAR
Shareholders of 3 banks have received liquidation dividend in the sums of N620 million, N600 million & N293 million respectively
Risk Assets Management N22 billion recovered from debtors of 43
banks Sale of Fixed Assets/Chattels
N19.34 billion realized from sale of physical assets
Sale of Investment N2.64 billion realized from sale of investment
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CHALLENGES
Public Awareness Legal
Long-drawn out litigation on winding-up actions and debt recovery matters
Operational Bank management
Poor corporate governance Insider abuse
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CHALLENGES
Poor lending culture Credit appraisal Documentation
Poor record keeping Financials Mandate records Broken down IT systems
Uncooperative attitude with the bank closing team
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CHALLENGES
Asset Realization Risk Assets (Loans)
Poor quality Large size insider loans Lack of secondary market Court sympathy for debtors
Real Properties Weak title for landed properties Slump in property market
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